The Asset Base
A penny saved is a penny earned.
Benjamin Franklin, American polymath and one of the Founding Fathers of the United States.
To invest and to increase your wealth you need money. Calculating the budget and your asset base is not only for the ones who are tight at the end of the month, but it is also valuable for everyone! Learn in this article how to calculate how much you can invest!
Overview: 2.2. Define your Asset Base
1. Calculate how much you can invest
Too many people spend money they haven't earned, to buy things they don't want, to impress people they don't like.
Will Rogers, American actor and, humorist, known as "Oklahoma's Favorite Son"
Starting your investment should be based on three important pillars:
- Monthly Incomes, e.g. from your salary or rent that you are receiving
- Yearly Incomes, e.g. from bonuses or dividends from stocks you already own
From these you have to subtract:
- Monthly costs, e.g. for your daily living, rent, insurances, car, etc.
- Yearly costs, e.g. taxes, tuition, etc.
This will lead you to the maximum amount of money that you can invest monthly and yearly. Here, you have to choose if you want to invest all of the remaining budget or only a share, in general, you should invest as much as possible. This will lead you to the following asset bases to invest:
- Monthly investments: money that you put every month into your investments.
- Yearly investments: money that you put yearly into your investments.
- Initial Investment: the initial amount of money that you put into your investments at the start.
2. The earlier you start with building up your financial future, the better.
A journey of a thousand miles must begin with a single step.
Lao Tzu, ancient Chinese philosopher and writer, author of the Tao Te Ching and founder of philosophical Taoism
When should you start to save money and invest? Now! Forbes created an analysis of how a late start affects your required savings rate. When you start at age 15 you need to save 8% of annual income for life, at age 30 you need to save 21.4%, at age 40 you need to save 43.2%.
|Age of starting to save||15||20||25||30||35||40|
|Percentage of annual income||8%||11.1%||15.4%||21.4%||30.1%||43.2%|
3. Bring your life into order and make a budget
Wealth consists not in having great possessions, but in having few wants.
Epictetus, Greek philosopher, his philosophy says we should accept calmly and dispassionately whatever happens, but we are responsible for our own actions, which we can control through rigorous self-discipline.
To be able to invest, you must have some money left at the end of the month. This is not easy for everyone in the consumer world. If you are not at a stage where you are able to save some money, rethink what you are doing. If you do not change now, you will remain poor forever. You must put the money to work for you. The first step into that direction is to become debt-free. Any debt is the exact opposite of investing, you must pay extra money instead of receiving it.
- Live on a standard you can afford – or below: To save some money you should differentiate between want and need. Maybe a Starbucks coffee a week is enough or sharing an apartment gives you new friends and good savings. To really build-up wealth in the long-term you will have to save some money. So why not prepare your own coffee at home and take it along? Why not go running and use dumbells at home with friends?
- Keep track of your finances: To know how much you can invest each month, you must know how much money you need to live on and how much money you make. Therefore you can have a look at the bills of an average month from last year and take some extraordinary events like Christmas and holiday into account.
- Make a budget: Once you have all your info together, you can start to set-up your budget. Only one in three Americans has a budget according to a survey by gallup.com. Include your regular incomes and other incomes as well as regular expenses. Also put some budget for car or house repairs and maintenance as well as Christmas presents, holidays and other events that do not take place every day. The most important point is to include savings in your budget and determine a certain amount of money that goes into your investments every month. This sounds boring, but once you started investing and seeing the return you will feel the desire to increase your savings.
Being debt-free and investing money is the key to future wealth. Make a budget and plan regular investments. Take the quiz below and continue reading our next article!
Test yourself and finish this step of the Investment Academy!